FTUK

WHAT IS A MOVING AVERAGE?

Moving averages are one of the few indicators that are highly profitable when used alongside a robust structure of technical analysis

A moving average is one of the only indicators we use to support our technical analysis. It indicates the current market direction and trends with other benefits.

There are two different types of moving averages, depending on what data they collect and where they sit on the chart. We like to use the exponential moving average (EMA), although some traders opt for the simple moving average (SMA).

Moving average setup

The main setup for the moving averages that we employ is 9 (blue) and 18 (red), which can be used on all time frames and can be implemented as a trade confirmation. We also use the 200 daily moving average (DMA) and 200 weekly moving average (WMA) as a long-term confluence.

Purpose of Moving averages

Depending on how you use them, moving averages can offer both short- and long-term trade direction impulses with early signs of trend continuations and reversals. When rolling averages cross, it can suggest a trend change on that specific time frame. Managing support and resistance or to trade the crossovers is the main use of rolling averages. Some traders may only use one certain moving average, but using multiple allows the further confluence of these cross-over points.

Don't use them as gospel

Whilst they can be a great tool in a trader’s toolkit, it’s important to use other forms of technical analysis before we place any trades based on moving averages. They should be part of the later tasks that involve breaking down charts as a final confluence to support a trade direction and confirmation on an already solid amount of information. Remember the markets on the higher time frames always leave many clues as to when prices will end up. Use the moving averages to spot the destinations of the currency pairs.

Dynamic support and resistance

As previously mentioned, rolling averages can also be used as dynamic support and resistance. Many moving averages carry more weight than others in the market, and using multiple can show the long-term dynamic areas we should be looking for trade entries at.

Ideally, on the daily and weekly, we want to use moving averages in this way and not on much lower time frames. However, using this indicator on the hourly for crossovers can serve as a great entry confluence for a trade. 

Conclusion

To conclude, moving averages are one of the most popular indicators as they are accessible on almost every platform, including MetaTrader 4. Make notes on them when recording your charts and look for correlations with what works for your trading style. As you gain experience with moving averages, you will see that they can be a very profitable tool.

But remember, these are indicators, and all indicators lag the current price, so use them only as final confluences. 

Forex Traders UK is passionate about educating traders about winning trading strategies. In addition to articles on technical analysis, we also write about technical mindset and other Forex-related topics. Subscribe to our newsletter to keep informed about our newest blog posts.

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